State employees don’t need to panic

The number of queries from teachers about pension benefits has increased by as much as 8% since last year. The increase is due to misunderstandings around pending retirement reform measures and desperate attempts to address debt problems as more teachers want to resign so they can access their money now. Neesa Moodley explains

Basil Manuel, the president of the National Professional Teachers’ Association of SA, says it is a “fool’s paradise” to believe that you can retire at 50 and enjoy a comfortable retirement.

“I think many teachers are looking at their pension fund benefit statements and a benefit of R1?million to R1.8?million looks like more money than they have ever imagined,” he says.

Wilna Potgieter, a financial planner at Consolidated Financial Planning, says that if you have discretionary funds of R1.8?million and you invest that money at a targeted return of 10% a year, you will be able to draw down a monthly income of R20?000 for just 17 years.

“Even more scary is that if you take inflation into account, the amount of money you draw down each month is going to increase each year and that R1.8?million will only last you 10 years,” she says.

Rowan Burger, the head of alternative products at Momentum, points out that government employees are governed under a piece of legislation that pertains specifically to their own fund, rather than by the broader Pension Funds Act. There are moves to try to have the Government Employees’ Pension Fund (GEPF) governed by the Pension Funds Act, which would have the benefit of allowing members to raise specific concerns with the Pension Funds Adjudicator.

But what teachers and other government employees are failing to recognise is that firstly, the retirement reforms that take effect from March 1 2015 only affect provident funds and secondly, that the GEPF falls under its own legislation, which is unaffected.

The GEPF is also a defined benefit fund, which means your pension benefit is guaranteed, but only if you leave your money invested until you retire.

Manuel also points out that while teachers are accessing their pension fund benefits early, they are not taking into account the benefits they lose if they resign.

“For example, if you resign as a teacher, you lose your postretirement medical aid benefit and your medical costs only increase as you get older. This leaves many people battling financially in their retirement,” he says.

How the reform will work

Arno Loots, the head of umbrella funds at Liberty Corporate, explains that the retirement reform is going to happen in two stages.

The changes that come in next year relate more to how you can withdraw your money from your retirement fund, and they relate to a provident fund.

There are no changes to the withdrawal you make when you retire from a pension fund or retirement annuity. Currently, if you belong to a provident fund, you can withdraw 100% of the invested money less tax when you retire.

Under the new rules, you will only be allowed to withdraw one-third of your provident fund on retirement and you will have to use the remaining two thirds to buy a pension (an annuity that will pay you a monthly amount). This step means that when you retire, regardless of whether your withdrawal is from a provident fund, a pension fund or a retirement annuity, it will be treated the same.

But there are important provisions to this new rule, which means you will still be allowed to retire and take out 100% of the money in your provident fund under the following circumstances:

.?The money in your provident fund is less than R150?000; or

.?All the money you have saved (and the growth on that money) in your provident fund up to March 1 2015 can be taken as a lump sum on retirement. This means retirement funds will have to have two running statements of account for you – one for the money in your provident fund up to March 1 2015 and one for all the money invested and earned thereafter.

Loots says: “Taking these provisions into account, the impact if you resign today will be the same as if you resign in August next year. The unfortunate result of the mass panic resignations and withdrawals is that people are going to spend their retirement savings. For example, they might decide to pay off their car or their bond, but they are going to have little to no savings to access when they do retire. This leads to increased dependency on the government and their family members.”

Michelle Dubois, a legal marketing specialist at Liberty, says if you are already 55 on March 1 2015, there will be no changes to the way you access your provident fund on retirement and the new rules will not apply to you at all.

The logic behind this is that the government has acknowledged that those who are 55 and older have already committed to a financial plan for their retirement.

“If you panic and resign now, you are only going to receive R25?000 tax-free, whereas if you wait until retirement to access your money, you will receive as much as R500?000 tax-free.”

Burger explains: “Ultimately, the broader purpose of the retirement reform is to encourage people to act in their own best interests. In order to enjoy a decent retirement, you need at least 35 consecutive years of saving, as this is when your money really starts to work for you through the compounding effect of interest.”

Where does the confusion arise?

The confusion and misconception that government is trying to “lock up” your retirement funds is largely tied to the concept of what is known as “P-day”.

This refers to “preservation day” and is the day when compulsory preservation will come into force. But the Treasury has indicated that P-day is two years or more away from coming into effect.

There are also still discussions taking place as to how compulsory preservation would work and nothing has been decided yet.

Things to consider

Tax on early withdrawal vs tax on retirement

If you have a pension fund benefit of R3?million and you choose to cash in R1?million now, the first R25?000 you withdraw now will be tax-free and you will pay tax of R207?000 on the remaining R975?000.

If you wait until you retire to withdraw the R1?million lump-sum benefit, the first R500?000 is tax-free and you pay tax of R117?000 on the remaining R500?000. So, at retirement, you will receive R90?000, or 11.3%, more than if you had cashed in your money early.

Taxes to encourage you not to access retirement savings early National Treasury introduced changes in March this year designed to encourage you to stay invested until retirement and not to access your money early by resigning or changing jobs.

If you change jobs and withdraw a lump sum from your retirement fund, the first R25?000 is now tax-free. But the tax you pay on subsequent withdrawals increased as follows:

.?You will pay 18% tax on withdrawals between R25?000 and R660?000. The tax on withdrawals between R660?000 and R990?000 has increased to R114?300 plus 27% of your taxable income above R660?000.

.?Your withdrawal of more than R990?000 will be taxed at R203?400 plus 36% of your taxable income above R990?000. When you retire, on the other hand, the tax-free lump sum you can withdraw is now R500?000.

The tax you pay on the amounts you withdraw thereafter has also decreased:

.?Withdrawals between R500?000 and R700?000 will be taxed at 18% of your taxable income above R500?000;

.?Withdrawals between R700?000 and R1.05?million will be taxed at R36?000 plus 27% of your taxable income above R700?000; and

.?Withdrawals of more than R1.05?million will cost you R130?500 plus 36% of your taxable income above R1.05?million.

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